Posts Tagged ‘foreclosures’

HAMP: Borrowers Not Getting A Fair Shake From Servicers

A recent GAO report reveals what many critics of HAMP have long known  to be true: servicers are not treating borrowers fairly and uniformly when it comes to getting a HAMP loan modification.

The GAO found several areas of inconsistency that could result in inequitable treatment of similarly situated borrowers:

  • Because Treasury did not include guidelines for borrower solicitation into the HAMP program until after a year since its inception, servicer outreach to borrowers ranged from 31 days to more than 60 days into a delinquency. Similarly, there were no guidelines for borrower communication, resulting in long delays for responses to borrower applications and for information on the program.
  • Although part of the HAMP program was meant to reach out to borrowers before they fell behind on payments, no guidelines have been issued regarding what “imminent default” means. As a result, of the ten servicers surveyed, the GAO found all of them had 7 different criteria for determining “imminent default.”
  • Treasury has issued no guidelines for servicer internal quality assurance to ensure compliance with HAMP guidelines. Some servicers aren’t reviewing denials to ensure that they are just.
  • Treasury has not adequately made borrowers aware that the HOPE hotline may be used to raise complaints regarding how servicers are handling HAMP modifications.
  • Treasury has not established clear consequences for servicer non-compliance with HAMP guidelines.

I hate to sound like a broken record, here, but there is one major overriding reason why HAMP is not working out too well: it is a voluntary program with no teeth. Relying on servicers to help borrowers when the relationship between servicer and borrower is adversarial is like using a fox to guard the henhouse and being surprised when all the chickens are gone the next morning.

In a foreclosure situation, the interests of the borrower and the servicer are completely misaligned: the borrower needs payment relief to be able to stay in the home, or barring that, a way to sell the home and leave with a little money to start over somewhere else. The servicer on the other hand, primarily wants to make as much money as it can, and secondarily, it wants to ensure that the investor gets the best rate of return.

Prior to HAMP, loan modifications were rare and servicers, in general, were loathe to even discuss them. Loan modifications cost the servicer  money on the front end,  and result in a diminished rate of return for the investor. HAMP was supposed to address this issue by giving servicers and investors incentive payments to make modifications a more attractive option than outright foreclosure.

It hasn’t quite worked out that way. The incentive payments provided by HAMP remain a drop in the bucket as compared to what servicers can generate by foreclosing and considering that servicers and investors still view loan modifications as a last resort, they truly can’t be expected to willingly modify even a percentage of their portfolios.

Until the government forces banks to modify all delinquent loans, without concern for profits, either to the servicer or the investor,  the foreclosure crisis will continue to plague us and our economy will suffer the consequences.

Underwater Homeowners & HAMP: The Huge Problem of Negative Equity

Most homeowners who receive assistance from the Home Affordable Modification Program remain deeply underwater. The average homeowner in HAMP owes $1.50 for every dollar of their home’s value. This puts them at a greater risk of “walking away.” even after receiving a modification.

Republican critics of the program, like California Representative Darryl Issa say “It defies common sense that taxpayer money is being used to pay banks to modify loans that are likely to default anyway.”  In his usual “the free market is the answer to everything” zeal, he went on to say “In cases where the loan changes could keep borrowers out of foreclosure, banks have a clear incentive to make changes without a need for public funds.” He’s written to Treasury secretary Geithner to call for an immediate end to HAMP.

Except banks’ track record of loan modifications pre-HAMP was even worse than their record with HAMP.  The problem with banks and loan modifications, whether they’re private or government subsidized is that banks have proven singularly unwilling to do the one thing that will correct this entire mess: write down principle.

While recent changes to the HAMP program include provisions for principal reduction,  like everything else about the program,  it remains voluntary. Moreover, HAMP is designed so that the banks only modify loans from which they can profit. The entire NPV test, which is the test that determines whether someone qualifies for a HAMP modification or not, is designed to test whether it would be more profitable for the bank to foreclose or modify.  You don’t have to be an economic genius to see that it favors homeowners who are underwater since foreclosing on those folks will cause the bank to take that immediate loss. The deeper the home is underwater, the less profitable foreclosing becomes.

Of course, you also don’t need to be an economic Einstein to see that it also makes sense to bring loan values in line with the values of the properties securing the loans. I mean, that would make perfect sense, right? How can someone have a $300k mortgage on a home worth $150k and actually call that a secure investment?

The bean counters at the banks, unfortunately, don’t have too much economic sense. They just look at the dollars and cents on the banks’ balance sheets and if they’re decreased in any way, well, the sky is falling. I am not going to argue that principle write-downs won’t affect the banks’ bottom line. Of course they will. However, it’s a bit like receiving your bank statement, which , through an error shows you have a million dollars instead of only a thousand dollars. Of course, you’d much rather pretend that there wasn’t an error, and bank of the basis that you have a million dollars to spend, or invest,  but at the end of the day, that million dollars doesn’t exist. It is  just $999,000 of funny money. Mortgages that far exceed the value of the homes upon which they are secured are just as much funny money as the million dollar account error is. 

The world works differently for banks than it does for the rest of us, though. For the banks, they can continue to play with funny money, while you won’t be able to even pretend you’re $999,000 richer than you actually are for very long.

Fannie Mae Fall Out

In a New York Times article today, lending experts sounded off concerns about Fannie Mae’s new hard line approach toward strategic defaulters.

For one, the experts say, in a time where the banks, including Fannie and Freddie, received big taxpayer bailouts, it is going to be hard to convince borrowers that they should end up stuck with the tab. For another, they wonder how Fannie intends to weed out those who strategically default from those with financial troubles.

The experts were also puzzled about just what Fannie intends to accomplish. Fannie spokespeople have said that they want to force people to work with their servicers on alternatives to foreclosure such as lender approved short sales and deeds in lieu. However, as I have pointed out  in yesterday’s post on the subject,  lenders and servicers have proven completely unwilling to work with borrowers on so called “foreclosure alternatives.”

Furthermore, this policy does nothing to address the negative equity problem, known colloquially as being “underwater,” where a borrower owes more on his home than it is worth. As the article points out:

About a quarter of homeowners with mortgages, or about 11 million households, owe more than their home is worth, and are potentially vulnerable to a strategic default. A flat or rising real estate market could encourage many of them to hold on; a declining market would suggest it was time to go.

While negative equity by itself does not cause foreclosures, it does encourage them in a down market. There are many reasons why someone, who isn’t having trouble paying his or her mortgage, may choose to walk away. One of them is because he or she has done the math and it doesn’t make sense to continue to “throw good money after bad.” Another could be that he or she needs to move because of changes in employment or other issues, and can’t sell the house because of how much he or she owes.

Whatever the reason, businesses make such choices all the time. Why is Fannie Mae trying to punish people for engaging in rational economic decision making? The answer is that neither Fannie nor any other large lender out there wants to come to grips with the reality that all they’re holding on to is worthless paper.

Fannie Mae’s Wrong Headed Gambit To Staunch Strategic Defaults

Last week, Fannie Mae issued a press release announcing that it was putting into place policy that would block strategic defaulters from getting a new Fannie Mae backed loan for seven years following the foreclosure.  In addition, Fannie Mae will also instruct its servicers to pursue deficiency judgments against borrowers where they are allowed.

Clearly, mortgage lenders do not like strategic defaults. They don’t like them because they’re kind of a wake up call to reality. Once lenders are forced to take back a home, they must face the immediate loss in value, which is why they want people to continue to pay. As long as they’ve got a paying mortgage, they can keep pretending the property securing the mortgage is worth the note value.

Yet, you’d have to have been living under a rock not to know that neither the lenders nor the servicers have done much to help homeowners avoid foreclosure. They’ve been recalcitrant when it comes to both loan modifications and short sales and many homeowners have, understandably, thrown up their hands and decided that walking away could save them a whole lot of stress and aggravation.

Instead of actually forcing its servicers to engage in meaningful work-out solutions with borrowers, Fannie Mae is, in effect, sticking its head in the sand and pretending that we aren’t in a foreclosure crisis at all.  The lenders do not want to face any losses at all, which meaningful work-out solutions would invariably force them to do, though not as steep as they would face in foreclosure.

HAMP Still Not Making The Grade: Geithner Refuses To Consider Alternatives

By almost every measure, the HAMP program continues to underperform in its effort to address the problem of mortgage foreclosures. Since its inception a year and half ago, only 340,000 homeowners have received permanent modifications and 436,000 have been dropped from the program. Last month alone, 155,000 homeowners were kicked out of trial modifications as opposed to only 30,000 who received new trial modifications. Accordingly, it appears the HAMP program is helping fewer and fewer homeowners as time goes on.


New Law Exempting More Borrowers From The Threat of Deficiency Judgments Will Have No Effect Today

Under current California law, no borrower is liable for a  deficiency judgment on a purchase money loan. A borrower may be held liable for a deficiency judgment on a refinance, however, but only if the lender chooses to foreclose through the court system in a long and expensive process known as a judicial foreclosure.  Most California foreclosures are non-judicial, and in that case, the lender would never be entitled to a deficiency judgment.

Where the deficiency judgment debate matters is in negotiations for short sales on non-purchase money loans. Currently, lenders can require homeowners to sign an unsecured promissory note for the difference between the sales price of the home and the amount of the note as a condition for accepting the short sale. They use the threat of pursuing a deficiency judgment to coerce homeowners into such agreements. Accordingly, the current rules merely serve as a dis-incentive for short sales as opposed to allowing the lender to foreclose.

Savvy homeowners may call the lenders’ bluff by making them start the foreclosure process. A lender has the choice as to which remedy it may use to recover its money, but it may not choose both. Therefore, if a non-judicial foreclosure has been started, usually by the recording of the Notice of Default, the lender has already made its choice.

A law currently being debated in the California legislature would have ended the threat of deficiency judgments completely. As it stands, if the law does pass, it would only affect borrowers who used refinanced money for home improvements and only on new loans. So, for most homeowners, this new law, if passed, would not change anything.

CitiMortgage Suspends Foreclosures For Homeowners Affected By The Oil Spill in the Gulf



On Wednesday, June 16, Citi CEO Vikram Pandit announced that his company would be suspending foreclosures for homeowners in the Gulf region in the wake of the BP oil spill disaster.  All foreclosure actions on Citi-owned mortgages will be suspended from June 17, 2010 to September 17, 2010.

Usually, I don’t have too many good things to say about banks, especially where foreclosures and mortgages are concerned, but CitiMortgage is attempting to do the right thing here. In the wake of the worst environmental disaster in U.S. history, the last thing Gulf Coast residents need to be worried about is foreclosure.

Unfortunately, this three month foreclosure moratorium will not apply to mortgages Citi services but does not own.  However, for those Gulf residents with Citi-owned mortgages, this decision by the bank will certainly help them and that is a good thing.

New Class Action Suits Could Create Precedent To Enforce HAMP Modification Agreements



By most measures, the Making Home Affordable Modification Program has had lackluster results in permanently averting foreclosures and dampening the effects of the foreclosure crisis. The main reason HAMP has been so ineffective is the fact that at its core, it remains a voluntary program on the part of mortgage loan servicers and lenders. In other words, HAMP has no teeth.  Servicers may choose to participate or not and even if they choose to participate,  nothing in the program language states that they must modify any loans.

Therefore, we have a situation where homeowners enter into trial modification agreements and comply with each and every condition of the agreement, only to have the servicer delay responding or continue to ask for more documents. All the while, the homeowner continues to make his or her trial payments. Worse, it is all too common for the borrower’s home to be foreclosed upon while the trial modification is pending, even though HAMP prohibits any foreclosure sale while the borrower is in a trial period plan.

Four class action suits, filed  by the Boston based non-profit  National Consumer Law Center, in the state of Massachusetts aim to give HAMP teeth it lacks. The lawsuits  claim that the trial plan is a contract that the servicers have breached by failing to modify the loan once all conditions have been met. The complaints go even further by suggesting that the signed agreement the servicers have with the U.S. Treasury represents a contract to mitigate the foreclosure crisis by offering assistance to homeowners at risk, and that by failing to modify enough loans, the servicers have breached that contract as well.

Should a judge rule in favor of the plaintiffs in these cases, a precedent will be established that renders both the trial plan and the agreement to join the HAMP program enforceable contracts.  This would mean that servicers would be required to give permanent modifications to those homeowners who comply with the terms of the trial plan, and furthermore,  be required to actually render assistance and prevent foreclosures per the HAMP agreement.

Strategic Default = A Free Rent. Really??

I am sick and tired of posts like this one. It is yet another moralistic, snide view point from a person without an ounce of common sense.

The Times story features Alex Pemberton and his mom, Wendy Pemberton, who both live in St. Petersberg, Fla., and who both pay an attorney $1,500 who says he does “as much as needs to be done to force the bank to prove its case.”

That $1,500 these homeowners are paying in lawyers fees is considerably less than what they’d pay to keep up with the mortgages. So they pay the lawyer and justify their defaults by saying that this is simply business. And nowadays, homeowners finally seem more apt to approach homeownership in a cold, even ruthless business manner

I have two major problems with the above statements: For one, how does the author know that paying on the mortgage would cost less than the $1,500 that these homeowners are paying the attorney? Moreover,  where in the story does it say they pay the attorney $1,500 per month?


Scare Tactics From The Mortgage Bankers Association On Strategic Defaulters

It seems that the Mortgage Bankers Association is very afraid these days. See, more and more homeowners who owe more on their homes than they’re worth are choosing to walk away rather than continue to pay, even if they can afford their payments.

Why should this scare the Mortgage Bankers Association? It is simple: if homeowners walk by the thousands, the banks will be forced to realize  immediate losses on their balance sheets when they take possession of the houses.  This is because the minute they take possession of the house, they can’t keep pretending that the value of the property is anywhere near the face value of the note.  Call it an unintended principle write-down. Banks don’t want this…they really don’t.

Since the old memes about the immorality of walking away from a mortgage and the threat of a damaged credit score haven’t been playing all that well lately, the Mortgage Bankers Association is trying a new scare tactic: Jay Brinkmann, its chief economists warns strategic defaulters that “it could be well over seven or eight years before [they] are able to obtain a mortgage to buy a home again.”

As property values continue to plummet as the result of the unabated foreclosure crisis, more and more homeowners are willing to walk away from their homes if they owe considerably more than the property is worth. Since lenders and servicers remain largely unwilling to do principle write-downs,  many homeowners believe they have no other choice but to walk away. After all, businesses do this all the time, including the Mortgage Bankers Association!  Yes, that’s right…just this past February, the Association short sold its headquarters which it bought in 2007 for $79 million, $75 million of that financed.  It sold the property for $41.3 million, well short of the amount it owed. “Do as I say, not as I do” much, MBA?

The reality is that no one knows where mortgage underwriting will be in the future. Right now, according to Fannie Mae and Freddie Mac standards, a person will not be able to qualify for a mortgage up to three years after a foreclosure. This may well change in the future, but I highly doubt that lenders would shoot themselves in the foot by refusing to lend to anyone with a foreclosure.  Foreclosures are too endemic now to carry the stigma they once did and the ravages of an out-of-control lending industry will be felt for some years to come.

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